Russian oil sanctions imminent. And they could disrupt markets in a big way

European oil sanctions are due to come into force on December 5th. The idea is to reduce oil revenues for Russia given its war in Ukraine.

Andrei Rudakov | Bloomberg | Getty Images

Upcoming sanctions on Russian oil will be “really disruptive” to energy markets unless European nations set price caps, analysts have warned.

The 27 countries of the European Union agreed in June to ban the purchase of Russian crude oil from December 5th. Specifically, the EU, along with the US, Japan, Canada and Britain, want to slash Russia’s oil revenues in an attempt to drain the Kremlin’s war chest after its invasion of Ukraine.

However, concerns that a full ban would push up crude prices led the G-7 to put a cap on how much they will pay for Russian oil.

According to Henning Gloystein, director of energy, climate and resources at political risk consultancy Eurasia Group, a total ban on Russian imports could “really disrupt” markets.

The potential for rising oil prices is “the reason behind US pressure” to agree on a cap, Gloystein told Health & Fitness Journal on Wednesday.

A price cap would result in G-7 countries buying Russian oil at a lower price to reduce Russia’s oil revenues without raising global crude prices.

However, the EU countries have been arguing for a few days about the correct level of the upper price limit.

The correct oil cap

A proposal discussed earlier this week proposed a limit of $62 a barrel, but Poland, Estonia and Lithuania refused to agree, arguing it was too high to hurt Russia’s revenues. These nations have been among the most vocal in urging action against the Kremlin over its aggression in Ukraine.

Speaking to Health & Fitness Journal’s Julianna Tatelbaum on Wednesday, the Dutch energy minister said a cap on Russian oil prices was “a very important next step”.

“If you want effective sanctions that really hurt the Russian regime, then we need this oil cap mechanism. Hopefully we can agree on that as soon as possible,” said Rob Jetten.

On Wednesday, Russian oil was trading at around $66 a barrel. Kremlin officials have repeatedly said that a price cap is anti-competitive and they will not sell their oil to countries that have imposed the cap.

They hope that other big buyers – like India and China – will not agree to the limit and will therefore continue to buy Russian oil.

China and India

The G-7 countries agreed to limit Russian oil in September and have been working on the details ever since. At the time, EU energy chief Kadri Simson told Health & Fitness Journal she hoped China and India would also support the price cap.

Both nations increased their purchases of Russian oil following Moscow’s invasion of Ukraine and benefited from discounted prices. Your participation is seen as essential if the restrictions on Russian oil are to work.

“China and India are crucial because they buy most of Russia’s oil,” Jacob Kirkegaard, a senior fellow at the Peterson Institute For International Economics, told Health & Fitness Journal.

“However, they will not commit for political reasons, as the cap is a US-sponsored policy and [for] commercial reasons as they already source a lot of cheap oil from Russia so why jeopardize that? Thinking they would join voluntarily was always naïve as Ukraine is not that important to them.”

India’s Petroleum Minister Shri Hardeep S. Puri told Health & Fitness Journal in September that he has a “moral duty” to his country’s consumers. “We will buy oil from Russia, we will buy from anywhere,” he added.

As a result, doubts are growing about the true impact of the restrictions on Russia.

“Energy sanctions against Russia are too late and too timid,” Guntram Wolff, director of the German Council on Foreign Relations, said by email.

“This is just the continuation of an unfortunate series of tentative decisions. The longer and later the sanctions come, the easier it will be for Russia to circumvent them.”

Correction: The 27 countries of the European Union agreed in June to ban the purchase of Russian crude oil from December 5th. An earlier version incorrectly stated the ban.